DeFi is short for decentralized financial applications. These are applications that allow users to interact with blockchain-based platforms in a way that enables them to transact value and data in a transparent, trustless manner. With the help of smart contracts, DeFi projects can operate as autonomous agents.
A DeFi project’s TVL (total value locked) tells you how much value has been locked up on its platform by investors or token holders. You can use this information to determine which projects are gaining popularity among crypto traders.
What does the total value locked mean?
TVL refers to the total value of cryptocurrency held in a DeFi protocol’s smart contracts. It is also referred to as “total collateralization” and “total deposits.”
DeFi protocols are often described as decentralized, open-source software that allows users to build their own financial applications on top of them. They offer users no deposit insurance or other guarantees, but can be used for storing cryptocurrencies in either fiat or stablecoin form among other things.
For example, an individual might choose to store $100 worth of Ethereum (ETH) in a smart contract managed by MakerDAO that pays out a daily interest rate based on how much ETH they have locked up within it. The more ETH this person locks up at once means that they will have less available for spending elsewhere.
But if they receive enough interest payments over time, then they might see this as worth it since they would then earn back some money while holding onto their digital assets such as Bitcoin, Ethereum including trading pair BTC USDT securely through the use of smart contracts.
Why does TVL matter in DeFi?
So what’s the deal with TVL? It’s a metric that shows the total amount of cryptocurrency currently being held in a DeFi protocol’s smart contracts.
Total value locked is an important metric for DeFi because it can help you get an idea of how much risk is on your platform and what kind of stability it has. If TVL goes down, you know there’s less risk for someone to withdraw their funds from your protocol and leave—but if it goes up unexpectedly high, then something may be wrong.
How Is Crypto TVL Calculated?
The total value locked (TVL) in DeFi protocols is the current value of all cryptocurrencies locked within DeFi.
It is calculated by multiplying the supply of a token by the price of that token. For example, if there are 10 million tokens with a $10 price each, then the total value locked will be $100 million USD worth of funds held across all contracts on that protocol.
Factors To Consider in Calculating TVL
Calculation of The Project’s Supply
- The total supply of the token is the number of coins that will ever be created.
- The circulating supply of the token is the number of coins currently available in circulation.
- The percentage of tokens that are locked refers to how many coins have been locked up and cannot be sold until a specified date, while unlocked means that they can be sold at any time.
Maximum Circulating Supply Available
The first thing that you should know is that the maximum circulating supply available (or “maximum available supply”) is not the same as total value locked. Most CDPs allow users to borrow more than they have deposited in order to make larger trades.
Current Price
The current price is the most important factor in calculating TVL. If a coin has a high price, it means that there are more investors and collectors who want to buy it—and so its TVL will increase as well.
On the other hand, if a coin, let’s say the LUNC coin, and it’s LUNC price falls or remains stagnant for some time (say, for six months or more), then there will be fewer people willing to buy and hold it—thus lowering its TVL value.
Largest network by DeFi TVL
The total value locked in a network is a measure of the total value of the network. The larger a network’s TVL, the more usage and activity there is on that blockchain. This is important because it helps determine how successful a project will be in the future, how much demand there will be for its crypto tokens and if they are being used as intended by developers and users alike.
There are many different ways to measure TVL but here we’ll focus on two main ones: DeFi TVL (Decentralized Finance) and Protocol Average Daily Use (ADU).
Conclusion
The total value locked (TVL) is a number that represents the amount of money that has been locked up in a DeFi system. The reason why this metric is important is because it helps us understand how much liquidity there really is out there.
As you can imagine, if everyone who had crypto were to sell at once then not only would prices plummet but also the price could go right back down to zero as well because there wouldn’t be enough buyers around anymore (when someone wants to buy something they need someone else willing).
So having more people holding onto their assets rather than selling them off at any given time should help prevent such an event from happening again; however, it’s still unclear whether or not this will actually work out given how volatile cryptocurrency prices seem like they’ll always be going up or down depending on what happens next week or month.
Disclaimer: This content does not necessarily represent the views of IWB.